12/30/2009 @ 2:50PM

The Retransmission War

Time Warner Cable
subscribers across the country could be facing a new year without college football bowl games and new episodes of American Idol.

In a battle in which viewers could be the biggest losers,
News Corp.
network Fox and
Time Warner Cable
are nearing the year-end expiration of the latter’s contract to carry Fox-owned stations, cable networks and regional sports networks in major markets like New York, Los Angeles and Dallas. (The negotiations don’t include Fox News channels.) At issue: Fox is threatening to pull its signal if the No. 2 cable company doesn’t agree to shell out subscriber fees–much as they do for cable networks–to the tune of $1 per month.

With weak advertising and increased competition from cable and the Web hammering broadcast networks, their executives have argued they can’t compete without adding subscriber fees, which their cable network rivals have long charged. They claim these so-called retransmission fees are not only justified but also critical to their long-term survival. (See “Networks Put the Squeeze on Cable”.) What happens between Fox and Time Warner in the coming hours will likely set the tone for all other negotiations with broadcasters going forward.

According to SNL Kagan estimates, it’s a battle worth fighting. In 2008, broadcast stations garnered slightly more than $500 million in retransmission cash from cable, satellite and telecommunications operators; SNL Kagan expects those fees to rise to $1.2 billion by 2011.

But broadcasters aren’t stopping there. They’re also asking their affiliates (the independently owned stations throughout the country with which they’ve struck deals to carry their fare for a significant portion of the day) to pony up a portion of their retransmission fees. The networks’ argument: They deserve the lion’s share of any compensation because they’re the ones supplying the sort of must-watch fare (think NCIS, Desperate Housewives and Sunday Night Football) that draws eyeballs and big fees.

“Any way you look at it, there should be a sharing,”
CBS
Chief Leslie Moonves said at an investor conference earlier this month. “[Distributors] are not paying retrans necessarily to watch Judge Judy,” he said, citing a syndicated series purchased by local stations.

Though the subject has only recently taken center stage, CBS has been pursuing retransmission cash since it split from cable giant
Viacom
in 2006. In its most recent round of negotiations with pay TV providers, analysts estimate the network has been able to secure about 50 cents per subscriber. But Fox has taken it to another level, publicly stating its desire for at least $1, if not much more.

“We realize this is going to be a tough challenge, but we’re determined to take a leadership position in creating an economic template for the future,” said News Corp. Chief Executive Rupert Murdoch at a shareholder meeting two months ago. Earlier this month, his No. 2, Chase Carey, who until recently sat at the other end of the table as chief of
DirecTV
, said Fox could ultimately fetch about $5 per subscriber given its top-rated offerings. (The priciest cable network, ESPN, gets around $4 per subscriber.)

As far as leverage is concerned, the showdown with Time Warner Cable couldn’t be better timed for Fox. In the coming month, the No. 1 network will be airing high-profile National Football League playoff and college bowl games as well as new seasons of prime-time hits 24 and American Idol. Not being able to see them would likely infuriate Time Warner customers.

But Pali Research analyst Richard Greenfield argues the battle isn’t as lopsided as it may appear. He believes News Corp. wouldn’t be interested in attracting the sort of extra regulatory scrutiny a drawn out and highly public battle could incur. In a research note dated Dec. 18, he said he imagined a 50 cent to 60 cent fee would ultimately be agreed upon within days after Fox programming is dropped.

In a letter to Sen. John Kerry, who wrote to Time Warner Cable and News Corp. last week requesting the companies reach an agreement so viewers could watch football on New Year’s Day, Time Warner Cable CEO Glenn Britt said his company is willing to accept binding arbitration “immediately” to resolve the dispute. However, News Corp.’s Carey said in a letter to Kerry on Wednesday that the company will not accept arbitration. Separately, Carey said in a memo to employees Wednesday that the company doesn’t expect to reach an agreement soon and will likely pull its broadcast programming from the cable network at midnight Thursday.

In recent weeks, both sides have mounted aggressive advertising and PR campaigns to sway the public (see KeepFoxOn.com and RollOverOrGetTough.com). Time Warner has provided its customers with a site to lodge complaints with programmers demanding fee increases as high as 300%. “You Can’t Get a 300% Raise. Why Should a TV Network?” reads one slogan. (Fox argues 300% is “off by a large multiple.”) Fox, on the other hand, has suggested consumers consider alternative providers like
Verizon
FiOS, DirecTV and Dish Network.

“Negotiations are ongoing, but Fox’s current demands are unreasonable and excessive, especially in this economic climate,” said Time Warner Cable spokeswoman Maureen Huff. Fox representatives did not respond to a request for comment.

Disputes over retransmission consent are nothing new. At this time last year, Nickelodeon and MTV parent Viacom found themselves in a similar back-and-forth with Time Warner Cable. At the eleventh hour, both sides reached an agreement, leaving New Year’s Day schedules unchanged.

Time Warner subscribers were not as lucky in 2000, when a retransmission rights battle resulted in ABC programming, including mega-hit Who Wants to be a Millionaire, being pulled from Time Warner systems for a brief period. Subscribers were greeted with a blank screen and a succinct note: “
Disney
has taken ABC away from you.”